IR35 and off-payroll working

The off-payroll working rules, more commonly known as the IR35 rules, were designed to address tax avoidance whereby individuals would seek to avoid paying income tax and national insurance contributions (NICs) by performing their services through an intermediary. 

The reform does not introduce a new tax or rules. The changes requiring medium and large private sector businesses to make an off-payroll working tax determination will apply from 6 April 2020. It is therefore vital that businesses start preparing now.

HMRC originally introduced IR35, also known as the off-payroll working rules, in 2000 to address the concern of ‘disguised employment’, i.e. individuals performing services through an intermediary such as limited companies and partnership to benefit from the tax advantages.

They require that individuals who work like employees, but through their own company, pay similar taxes to other employees.

The reform will not stop anyone working through a company if that suits them. The reforms require a determination for tax purposes to be undertaken to seek to ensure that individuals that work like employees, but through their own company, pay similar taxes to other employees.

Where the rules are engaged the organisation, agency, or other third party paying the individual’s company will need to deduct income tax and employee NICs and pay employer NICs.

Contractors are usually self-employed workers who provide services to clients for a set period through an intermediary, such as a limited company. Contractors have flexibility with regards to how they perform the services for the client.

Contractors are not employees and are therefore responsible for arranging payment of their National Insurance Contributions (NICs) and income tax.

From April 2020, the reforms will place an obligation on medium and large private sector businesses to determine if contractors are ‘contractors’ or ‘employees’ for tax purposes and to make income tax and NIC payments via PAYE if IR35 is engaged.

IR35 was first introduced in 2000 and already applies. The reform does not introduce a new tax or rules. The changes requiring medium and large private sector businesses to make an off-payroll working tax determination are set to take effect on 6 April 2020.

The draft Finance Bill 2019 was issued in July which looks likely to ensure the reforms are implemented in April next year. The determination rules already apply to public sector bodies having being introduced in 2017.

HMRC has developed a calculator to check employment status for tax (CEST).

This can be a useful tool but will not always be definitive, there are various additional factors which the Courts may take into consideration when determining the actual arrangements in place.

Work is being undertaken to improve the calculator and if any output of the calculator is relied upon, it needs to be remembered that HMRC can still look behind the assessment to consider if the results reflect the reality of the engagement.

From 6 April 2020, the IR35 rules will begin to apply to medium and large businesses in the private sector. The reform will bring all sectors in line with the public sector, where compliance has improved since the reform was introduced in 2017.

From April 2020, the IR35 Regulations will place an obligation on private sector businesses to determine the tax status for contractors engaged via intermediaries and if the rules are engaged the organisation, agency, or other third party paying the individuals’ company will need to deduct income tax and employee NICs and pay employer NICs.

If the IR35 rules apply to your business, you will need to ensure that appropriate determinations are undertaken of the tax status of individual contractors engaged via an intermediary.

You may also wish to consider implementing new policies and procedures which would build in an ‘IR35 assessment’ when onboarding any new contractors.

Where a determination is made that the rules do apply, the organisation, agency, or other third party paying the individual’s company will need to deduct income tax and employee NICs and pay employer NICs.

IR35 is a set or tax rules first introduced in 2000 which is used to refer to tax rules designed to reduce tax avoidance by contractors who are deemed to be “disguised employees” (individuals carrying out similar work to employees but that charge for their services via a limited company or other intermediary. IR35 takes its name from the original press release announcing its creation published by the then Inland Revenue (now HMRC).

HMRC’s IR35 investigations have reduced over the years, however HMRC is likely to pay more attention to private sector organisations from April 2020, given the shift in the obligation to make determinations regarding the applicability of the IR35 rules.

Umbrella companies, and the workers performing services under such arrangement, can be affected by the IR35 rules.

An umbrella company is an arrangement under which an individual is an employee of a company through which it performs services for a client.The worker will usually source the work themselves for which the umbrella company invoices the client.

The umbrella company manages payment to the worker and its tax obligations in return for a fee payable by the worker.

The is no exemption for charities who will need to consider if the rules apply of if they are exempt under the small companies’ exemption.

Whilst the contractor in the Dragonfly Consultancy Ltd case was ordered to pay £99,000 to reflect the accrual of taxes, there is no hard and fast rule on backdated payments. The calculation of taxes payable is likely to be determined on a case by case basis.

However, the reform itself is not retrospective. The current guidance is (and as was the case in the public sector implementation) that the HMRC will focus on ensuring businesses comply with the reform for new engagements, rather than focusing on historic cases.

HMRC will not carry out targeted campaigns into previous years when individuals start paying employment taxes under IR35 for the first time. Organisations ’decisions about whether workers are within the rules will not automatically trigger an enquiry into earlier years.

IR35 should not be avoided and an appropriate determination of the factual position should be undertaken. HMRC and the Courts pay more attention to the actual working arrangements of contractors rather than solely relying on the terms of a contract.

Whilst it is important to incorporate contractual terms that indicate a relationship falling outside of IR35 and the parties intentions, the contract should reflect what will happen in practice and a proper assessment of the tax status made accordingly.

Using the check employment status for tax (CEST) calculator available from HMRC may help to identify if IR35 applies or not. Although CEST should be used with caution as the courts have used other factors when determining whether an arrangement falls within or outside the scope of IR35.

If a business fails to undertake a determination when required, the liability for income tax and NICs will transfer until the determination is completed. There is also risk of HMRC investigation, penalties and legal proceedings for non-compliance.